Death of SMEs also in China
The following article that appeared in last Saturday’s “Italia Oggi” invites reflection on the fact that, incredible though it may seem, even China, and especially Zhejiang province, the exporting heart of the country, is having a liquidity crisis.
The data are, to say the least, disturbing. Almost 20% of the 360,000 small- and medium-sized businesses in China’s Zhejiang province, the exporting heart of the country, have declared bankruptcy since the start of the year due to a lack of cash flow. A phenomenon that also has far-reaching social implications to the extent that the government was forced to announce a series of measures to help the enterprises and calm nervous citizens.
The symbol and center of the crisis in China’s small- and medium-sized enterprises is the city of Wenzhou, in the heart of Zhejiang province, where there is an incredible epidemic of bankruptcies. Since the beginning of the year, at least 200 entrepreneurs took off or went into hiding when their cash ran out. Others committed suicide. It is a situation that could become even worse during Chinese New Year in January, a period when it is traditional for businesspeople to take advantage of the vacation to disappear without paying their employees.
According to the agency China Nouvelle, small- and medium-sized enterprises create about 80% of the jobs in China. So it is hardly surprising that the government is trying to find an answer to the situation. On Tuesday, the Council of State suddenly announced a series of financial and fiscal measures to help businesses in trouble. Primarily by easing access to credit: in a countertrend with respect to general policy, it authorized a relatively low mandatory reserve ratio for local banks that loan money to SMEs when the reserve ratio for large banks is generally around 21%. SMEs will also be exempt from certain taxes and the banks will be prohibited from charging them unreasonable rates for their services.
Denied credit by the big banks that prefer to give loans to state companies, frequently SMEs have no other choice than to turn to private guarantee firms that are in the loan business. But the interest rates are extremely high and can even be as much as 100%. Some analysts estimate that the number of “informal” loans exceeds 25% of the total debt for the entire country, but according to Crédit Suisse the loan black market in China is worth 465 billion euros with an annual increase of 50%.
Zhang Wenkui, chief economist at the Council of State’s research and development center, maintains that the recent measures adopted by Beijing will only bring temporary relief for SMEs and that nothing will change until the banking sector has been reformed and can offer different services for different types of customers. To describe the current situation Zhang has coined an interesting metaphor: “It is like an irrigation system that waters the big trees and ignores the bushes”.
Source: Italia Oggi
